If the last time you thought about buying a U.S. savings bond was when you needed a gift for a niece's eighth-grade graduation, it may be time to think again about this staid investment.
The government guarantees a minimum 6 percent annual rate of return on savings bonds if they are held more than five years, a rate that compares surprisingly well with the 3 percent now offered on many certificates of deposit and money-market funds.
Because of the inviting gap between market rates and the bonds' minimum rate, small investors have bought savings bonds at a near-record pace this year.
The government sold $1.47 billion in standard-issue Series EE bonds in August, the sixth monthly total over $1 billion during this fiscal year. If sales continue at that pace, they will top the $11.9 billion record set in fiscal 1986.
"They're not as boring as people think. They offer some opportunities that are unmatchable," said Jeffrey Goldberg, president of Financial Consulting Group, a Northfield, Ill., financial-planning group.
"Obviously the rate is a big attraction right now, and I don't doubt that's a reason for the big bump in sales this year," said Douglas Youngren, Chicago-district director for the U.S. Savings Bond Division of the U.S. Treasury Department.
Investors can earn more than the 6 percent minimum if interest rates rise in the next few years. That's because the government calculates a rate, based on 85 percent of the yield of five-year Treasury securities; it pays that rate or the minimum, whichever is higher at the time the bonds are redeemed.
Not coincidentally, the record-setting sales in 1986 occurred in market conditions much like today's, as most market interest rates had fallen below the savings-bond minimum. The minimum rate paid on savings bonds was then pegged at 7.5 percent, Mr. Youngren said.
But it didn't stay there long. At the end of 1986, the Treasury Department closed the gap by dropping the guaranteed minimum to 6 percent.
Among those who take a lesson from history, there is some concern that the government this year will lower the minimum rate, which it can do at any time.
To some, that means today's bonds are an even better deal, because they still would carry the 6 percent-minimum guarantee if the government lowered the minimum on new bonds.
"We've gotten no indication from Treasury that a change in the minimum is in the works," Mr. Youngren said. "But the secretary of the Treasury has the authority to change the minimum at any time."
Enthusiasm for savings bonds is not widespread, however, partly because investors still can earn better rates in some other vehicles.
"I think they are, for the most part, still too boring to bother most investors," said Robert Harden, vice president for Smith Barney, Harris Upham & Co. in Oakbrook Terrace, Ill.
"I think they've always been thought of as the province for money for the kiddies. I have not talked to an investor who has mentioned the word in several years," he said.
Mr. Harden said he believes that mortgage-backed securities are a better investment, though slightly more risky, with their current 7.5 to 8 percent interest rates.
Savings bonds can be purchased in a variety of denominations, as low as $50, which has always made them popular as gifts.
A bond's purchase price is half the instrument's face value. A bond bought for $100 doubles in value to $200, its face value, at the time of maturity.
Savings bonds now mature in 12 years, Mr. Youngren said. Interest is compounded semiannually and automatically reinvested, so there are no returns until the bond matures or is cashed in.
While investors must hold a bond for more than five years to earn the guaranteed minimum of 6 percent, they can earn rates that top 4 percent on bonds held as little as six months, Mr. Youngren said.
Investors are limited in the amount of money they may put into savings bonds in a year. Individual purchasers may buy up to $15,000 in bonds in a year, which carry a face value of $30,000.
A couple buying bonds jointly may buy up to $30,000, with a face value of $60,000, Mr. Youngren said. Parents may buy additional bonds in their children's names, too, with a $15,000 limit per child.